Student Notes Module A (June 2012)… · Module A (June 2012) Workshop 2 – Handout 6.1 (Case study 1) 1 Financial instruments Case study 1 Foxtrot Alpha Limited (‘FAL’) is a

Student Notes

Module A (June 2012)

Workshop Outline and Learning Methodologies

Session Methodologies Chapters covered Student Notes

Workshop 1

1. Introduction Presentation

Group discussion

Please refer to Workshop 1

Student Notes

2. Property related

standards

Case study

Group discussion

Ch. 5, 6, 8 and 12

3. Resolving

accounting issues

Case study

Group discussion

Ch. 9, 11 and 13

4. Wrap up Presentation

Group discussion

Workshop 2

5. Reboot Presentation

Group discussion

6. Financial

instruments

Case study

Group discussion

Ch. 18 Pg. 1 – 13

7. Consolidation Case study

Group discussion

Ch. 20, 27, 28, 29

and 30

Pg. 14 – 34

8. Leading a team

and teamwork

Group discussion

9. Conclusion Presentation

Group discussion

Student Notes Module A (June 2012)

Workshop 2 – Handout 6.1

(Case study 1)

1

Financial instruments

Case study 1 Foxtrot Alpha Limited (‘FAL’) is a manufacturing company with a year ended 31 March 2012.

On 1 January 2012, FAL purchased a 3% fixed interest investment for its fair value of HK$2 million.

3% was the market rate of interest when the investment was purchased. FAL is risk averse, and

decided to take out an interest rate swap also on 1 January 2012. Under the terms of the swap, it

exchanges the 3% fixed interest it receives on the investment for floating interest rate payments

based on the current market rate of interest.

There are no transaction costs involved in either the purchase of the investment or entering into the

interest rate swap.

At 31 March 2012, the market interest rate has increased to 5%. The fair value of the investment

has therefore fallen to HK$1.95 million. At the same date the fair value of the derivative is

determined to be HK$48,000.

FAL has formally designated the transaction as a hedging transaction and it has been fully

documented. The assessment of the effectiveness of the hedge can be conducted on an ongoing

basis. The company intends to keep the investment for two years.

Required:

In respect of the transactions described above:

(a) discuss the appropriate accounting treatment,

(b) calculate the amounts to be recognised in the financial statements for the year ended

31 March 2012, and

(c) outline the nature of any disclosure requirements.



(Case study 1)

2

Discussion points

Financial instruments – Fair value hedge

Case Study 1 – FAL

What are the issues?

FAL has purchased an investment measured at fair value, and an interest rate swap. Students are

required to:

(a) recognise that this is a hedging arrangement

(b) determine the effectiveness of the hedge

(c) discuss the accounting treatment, and

(d) outline the relevant disclosures required.

Which accounting standards should be used?

HKAS 39 Financial Instruments: Recognition and Measurement

HKFRS 7 Financial Instruments: Disclosures

What are the requirements of the accounting standards?

Definitions

A derivative is a financial instrument or other contract with all three of the following characteristics:

(a) Its value changes in response to the change in a specified interest rate, financial instrument

price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit

index, or other variable

(b) It requires no initial net investment or an initial net investment that is smaller than would be

required for other types of contracts that would be expected to have a similar response to

changes in market factors

(c) It is settled at a future date.

Hedging is designating one or more hedging instruments so that their change in fair value is an

offset, in whole or in part, to the change in fair value or cash flows of a hedged item.

A hedged item is an asset, liability, firm commitment, or forecasted future transaction that:

(a) exposes the entity to risk of changes in fair value or changes in future cash flows, and that

(b) is designated as being hedged.

A hedging instrument is a designated derivative or (in limited circumstances) another financial

asset or liability whose fair value or cash flows are expected to offset changes in the fair value or

cash flows of a designated hedged item. (A non-derivative financial asset or liability may be

designated as a hedging instrument for hedge accounting purposes only if it hedges the risk of

changes in foreign currency exchange rates.)



(Case study 1)

3

Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged

item attributable to a hedged risk are offset by changes in the fair value or cash flows of the

hedging instrument.

A fair value hedge is a hedge of the exposure to changes in the fair value of a recognised asset or

liability, or an identified portion of such an asset or liability, that is attributable to a particular risk

and could affect profit or loss.

(HKAS 39.9, LP Chapter 18, Section 6.2, 6.3)

For a hedging relationship to qualify for hedge accounting, the following conditions must be met:

(a) The hedging relationship must be formally documented (including the identification of the

hedged item, the hedging instrument, the nature of the hedged risk and the assessment of

the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged

item's fair value or cash flows attributable to the hedged risk). The hedging relationship must

also be designated at its inception as a hedge based on the entity's risk management

objective and strategy.

(b) There is an expectation that the hedge is highly effective in offsetting changes in fair value or

cash flows attributable to the hedged risk.

(c) For cash flow hedges, it must be highly probable that there is a forecast transaction since

such a transaction is the subject of the hedge. In addition, the transaction must present an

exposure to variations in cash flows that could eventually affect profit and loss.

(d) Reliable measurement of the effectiveness of the hedge.

(e) The assessment of the hedge is carried out on an ongoing basis (annually) and it has been

effective during the reporting period.

(HKAS 39.88, LP Chapter 18, Section 6.4)

In a fair value hedge, the hedged item is a recognised asset or liability. The hedged item is initially

recognised at cost and subsequently remeasured to fair value at the period end with any gain or

loss on the remeasurement recognised in profit or loss.

The hedging instrument is a derivative and measured at fair value. Any gain or loss resulting from

re-measuring the hedging instrument at fair value is also recognised in profit or loss.

(HKAS 39.89, LP Chapter 18, Section 6.5.1)

According to HKFRS 7, specific disclosures must be made relating to hedge accounting:

(a) Description of hedge.

(b) Description of financial instruments designated as hedging instruments and their fair value at

the reporting date.

(c) The nature of the risks being hedged.

(d) For cash flow hedges, periods when the cash flows will occur and when they will affect profit

or loss.

(e) For fair value hedges, gains or losses on the hedging instrument and the hedged item.

(f) The ineffectiveness recognised in profit or loss arising from cash flow hedges and net

investments in foreign operations.

(HKFRS 7.22-24, LP Chapter 18, Section 7.5.1)



(Case study 1)

4

How to apply the standards to the case

(a) Discussion of accounting treatment

Hedged item

The 3% fixed interest investment may be classified as a hedged item if it exposes FAL to fair

value risk, and if it is designated as a hedged item. The fixed interest element exposes the

investment to fluctuations in fair value, because movements in the market rate of interest will

cause its fair value to change. FAL has formally designated the transaction as a hedging

transaction and this has been fully documented. Therefore the investment is treated as a

hedged item according to HKAS 39.

The investment is initially measured at cost of HK$2 million. It is subsequently remeasured at

the year end to its fair value of HK$1.95 million. The change in fair value of HK$50,000 is

recognised in profit or loss for the year.

Hedging instrument

The interest rate swap is a derivative according to the HKAS 39 definition, as its value

changes in response to an underlying characteristic, in this case the variable market interest

rate, and it had no initial transaction cost. According to HKAS 39, it also meets the definition

of a hedging instrument, as its change in fair value should offset the change in fair value of

the investment to which it relates.

The interest rate swap has no initial cost, so there is no accounting entry when it is entered

into on 1 January 2012. However by the year end, due to the increase in market interest

rates, the swap now has a fair value of HK$48,000. This means that the swap should be

recognised as a financial asset, with the change in fair value of HK$48,000 recognised in

profit for the year.

Hedge effectiveness

HKAS 39 states that hedge accounting can be applied only when certain criteria have been

met. One of the criteria relates to the effectiveness of the hedge. The effectiveness must be

in the range of 80-125%, and is calculated for this transaction as follows:

change in hedging instrument 48,000

96%

The hedge effectiveness is 96% for FAL’s transaction, which falls within the HKAS 39

parameters of 80-125%, so hedge accounting is applied.

Hedge accounting

This simply means that the gain on fair value remeasurement of the interest rate swap is

directly offset against the loss on fair value remeasurement of the investment. Therefore a

net figure is presented in the statement of comprehensive income.



(Case study 1)

5

(b) Accounting entries

HK$

1 January 2012

DEBIT Financial assets 2,000,000

CREDIT Cash 2,000,000

Being the purchase of the fixed interest investment and recognition at cost / fair value.

Note: there is no accounting entry for the interest rate swap on 1 January 2012 as it has no

initial transaction cost.

31 March 2012 HK$

DEBIT Profit or loss 50,000

CREDIT Financial assets 50,000

Being the loss on fair value remeasurement of the fixed interest investment.

DEBIT Financial assets 48,000

CREDIT Profit or loss 48,000

Being the increase in fair value remeasurement of the interest rate swap.

Recommendation / Justification

FAL’s statement of financial position includes:

Non-current assets HK$

Financial assets:

Fixed interest investment 1,950,000

Derivative 48,000

FAL’s statement of comprehensive income includes: HK$

Net loss on remeasurement of hedged transaction 2,000

(c) The notes to the financial statements should include the following disclosure notes:

Description of hedge and the nature of the risks being hedged.

FAL purchased a fixed interest investment and due to the fair value risk exposure created by

the investment, on the same date entered into a variable interest rate swap. This has been

designated as a hedging transaction and fully documented as such.

Description of financial instruments designated as hedging instruments and their fair

value at the reporting date.

The interest rate swap is a derivative financial instrument whose fair value is determined by

the market rate of interest. The fair value of the swap at 31 March 2012 is HK$48,000.

Gains or losses on the hedging instrument and the hedged item.

Movement in the market rate of interest caused the investment to fall in value by HK$50,000.

At the same time the fair value of the derivative increased by HK$48,000. These gains and

losses have been recognised as part of profit for the year.



(Case study 1)

6

Key Learning Points

1. Investments in financial assets often expose a company to the risk that the fair value of the

investment may change.

2. A company may enter into a derivative to counter against the fair value risk of the

investment.

3. When these two things happen the company may choose to designate the transaction as a

hedge transaction.

4. The derivative is recognised as a financial asset or liability at fair value at the year end, and

the investment is also remeasured to fair value at the year end.

5. Assuming other criteria have been met, the gains and losses on the remeasurement of the

investment (hedged item) and the derivative (hedging instrument) are both taken to profit or

loss and netted against each other.

6. To ensure transparency HKFRS 7 requires disclosures to be made which help users of the

financial statements understand the nature of hedging arrangements and the impact they

have had on profit or loss for the year.



(Case study 2)

7

Financial instruments

Case study 2 Dearden Robson Limited (‘DRL’) is a Hong Kong based transportation company. On 1 April 2006,

the company took out a HK$24 million bank loan with HCS Bank at a fixed interest rate of 10% in

order to finance the acquisition of new technology which it expected to generate revenues until

2018. The loan agreement required repayment of the full amount outstanding on 31 March 2014,

with interest payments made annually in arrears over the term of the loan.

During the course of the year ended 31 March 2011, DRL suffered from poor trading conditions as

a result of the weak world economy. The company has therefore renegotiated the terms of the

outstanding bank loan such that the term of the loan is extended by two years and a new interest

rate of 5% is applied to the loan with effect from 1 April 2011. DRL determines that the market

interest rate at which it could obtain a new loan with similar terms on this date is 11%.

As a direct result of the re-negotiation of the loan, legal and other costs of HK$120,000 are incurred.

Required:

(a) Discuss the accounting treatment of the modification of terms of the bank loan.

(b) Calculate amounts to be recognised in the financial statements of DRL in respect of

the loan in the year ended 31 March 2012 and subsequent years.

(c) List the disclosures required by HKFRS 7 in respect of the loan.



(Case study 2)

8

Discussion points

Financial instruments – Modification of bank loan

Case Study 2 – DRL


DRL has renegotiated the terms of an existing long term bank loan such that the fixed annual

interest rate is reduced and the loan term extended.

Students must:

(a) consider the accounting treatment required to reflect the modification of the loan.

(b) calculate amounts for inclusion in the financial statements of DRL for the year ended

31 March 2012 and subsequent years until the loan is extinguished.

(c) draft the disclosures required by HKFRS 7 in respect of the loan.


HKFRS 7 Financial Instruments: Disclosures

HKFRS 9 Financial Instruments


An entity shall recognise a financial liability in its statement of financial position when, and only

when, the entity becomes party to the contractual provisions of the instrument.

(HKFRS 9.3.1.1, LP Chapter 18, Section 3.2)

At initial recognition, an entity shall measure a financial liability at its fair value minus, in the case of

a financial liability not at fair value through profit or loss, transaction costs that are directly

attributable to the financial liability.


The best evidence of fair value is quoted prices in an active market. If the market for a financial

instrument is not active, an entity should establish fair value by using a valuation technique in order

to establish what the transaction price would have been on the measurement date in an arm’s

length exchange motivated by normal business considerations. Valuation techniques include using

recent arm’s length market transactions between knowledgeable, willing parties, if available,

reference to the current fair value of another instrument that is substantially the same and

discounted cash flow analysis.


An entity shall remove a financial liability from its statement of financial position when it is

extinguished i.e. when the obligation specified in the contract is discharged, cancelled or expires.

(HKFRS 9.3.3.1, LP Chapter 18, Section 3.4.2)

A substantial modification of the terms of an existing financial liability, or part of it, is accounted for

as an extinguishment of the original financial liability and the recognition of a new financial liability.




(Case study 2)

9

The terms of a modified financial liability are substantially different if the discounted present value

of the cash flows under the new terms, including any fees paid net of any fees received and

discounted using the original effective interest rate, is at least 10 per cent different from the

discounted present value of the remaining cash flows of the original financial liability. If an

exchange of debt instruments or modification of terms is accounted for as an extinguishment, any

costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the

exchange or modification is not accounted for as an extinguishment, any costs or fees incurred

adjust the carrying amount of the liability and are amortised over the remaining term of the modified

liability.

(HKFRS 9.B3.3.6, LP Chapter 18, Section 3.4.2)

The difference between the carrying amount of a financial liability extinguished, and the

consideration paid, including non-cash assets transferred or liabilities assumed should be

recognised in profit or loss.


Information that enables users of the financial statements to evaluate the significance of financial

instruments for financial position and performance should be disclosed, including:

the carrying amount of financial liabilities measured at amortised cost

(HKFRS 7.8)

net gains or net losses on financial liabilities measured at amortised cost

(HKFRS 7.20)

total interest expense calculated using the effective interest method

(HKFRS 7.20)

the fair value of each class of financial assets and liabilities

(HKFRS 7.25)

qualitative and quantitative data which enables users to assess the nature and extent of risks

arising from financial instruments.

(HKFRS 7.31–32A)

(HKFRS 7, LP Chapter 18, Section 7)

How to apply the standard to the case

On 1 April 2006, when DRL took out the bank loan, this would have been recorded at fair value as

(HK$000):

DEBIT Cash 24,000

CREDIT Bank loan 24,000

At the end of each accounting period to the date of modification ie on 31 March 2007, 2008, 2009,

2010 and 2011, interest arising on the loan would have been recorded by (HK$000):

DEBIT Finance costs (24m × 10%) 2,400

CREDIT Cash 2,400

At the date of the modification, 1 April 2011, the loan is therefore still reflected in the accounts of

DRL at its original value of HK$24 million.



(Case study 2)

10

On 1 April 2011, the modification must be assessed in order to determine whether it is ‘substantial’.

The modification is substantial if the present value of the future cash flows under the new terms,

including net fees paid, differs by 10% or more from the present value of the remaining cash flows

of the existing liability. The calculation should be carried out using the original effective interest rate,

in this case 10%:

Original liability – cash flows

Date of cash flow Cash flow

HK$

Discount factor PV of cash flow

HK$

31 March 2012 (2,400,000) 1/1.1 2,181,818

31 March 2013 (2,400,000) 1/1.12

1,983,471

31 March 2014 (26,400,000) 1/1.13

19,834,711

24,000,000

Therefore the modification is substantial if the present value of the modified cash flows including

fees incurred is less than HK$21.6 million (90% of HK$24m) or greater than HK$26.4m (110% of

HK$24m).

Modified liability – cash flows

The interest rate is modified to be 5% therefore interest of HK$1,200,000 (HK$24m x 5%) arises

each year. The term is also extended by two years:


HK$


HK$

31 March 2012 (1,200,000) 1/1.1 1,090,909

31 March 2013 (1,200,000) 1/1.12

991,736

31 March 2014 (1,200,000) 1/1.13

901,578

31 March 2015 (1,200,000) 1/1.14

819,616

31 March 2016 (25,200,000) 1/1.15

15,647,217

19,451,056

Renegotiation fees 120,000

19,571,056

The present value of the modified cash flows is lower than HK$21.6 million and therefore this is a

substantial modification.

HKFRS 9 therefore requires that the original liability is derecognised and a new liability recognised

in its place.

In order to recognise a new liability, its fair value must be estimated. This is determined as the

present value of the future cash flows associated with the loan, discounted at the market rate at

which DRL could currently obtain a loan with similar terms. The estimated fair value is therefore:


HK$


HK$

31 March 2012 (1,200,000) 1/1.11 1,081,081

31 March 2013 (1,200,000) 1/1.112

973,947

31 March 2014 (1,200,000) 1/1.113

877,430

31 March 2015 (1,200,000) 1/1.114

790,477

31 March 2016 (25,200,000) 1/1.115

14,954,973

18,677,908



(Case study 2)

11

The entry on 1 April 2011 required to derecognise the old liability, recognise the new liability and

associated costs and recognise the gain on extinguishment is (HK$):

DEBIT Existing bank loan 24,000,000

CREDIT New bank loan 18,677,908

CREDIT Cash (renegotiation fees) 120,000

CREDIT Gain on extinguishment

(24m – 18,677,908 – 120,000) 5,202,092

The new liability is now accounted for using the new effective interest rate of 11% and amortised as

follows:

Y/e 31 March Loan b/f

HK$

Finance cost

(11%)

HK$

Cash

HK$

Loan c/f

HK$

2012 18,677,908 2,054,570 (1,200,000) 19,532,478

2013 19,532,478 2,148,573 (1,200,000) 20,481,051

2014 20,481,051 2,252,916 (1,200,000) 21,533,967

2015 21,533,967 2,368,736 (1,200,000) 22,702,703

2016 22,702,703 2,497,297 (25,200,000) -

Therefore in the year ended 31 March 2012, and subsequent years, the following entries are

required to recognise the finance cost and payment of interest (HK$):

2012 DEBIT Finance cost 2,054,570


CREDIT New bank loan (balance) 854,570



CREDIT New bank loan (balance) 948,573



CREDIT New bank loan (balance) 1,052,916







DEBIT New bank loan 24,000,000




(Case study 2)

12


Statement of financial position for DRL as at 31 March

2012 2013 2014 2015 2016

HK$ HK$ HK$ HK$ HK$

Non-current liabilities

Bank loan 19,532,478 20,481,051 21,533,967 - -

Current liabilities

Bank loan - - - 22,702,703 -

Statements of comprehensive income for DRL for the years ended 31 March

2012 2013 2014 2015 2016

HK$ HK$ HK$ HK$ HK$

Exceptional gain on

extinguishment of bank loan

(5,202,092)

Finance costs 2,054,570 2,148,573 2,252,916 2,368,736 2,497,297

In addition to the amounts presented in the financial statements and shown above, DRL should

disclose the following in the notes to its financial statements:

The fair value of the liability

Qualitative data including:

– exposures to different types of risk and how they arise

– objectives, policies and processes for managing the risk

– methods for monitoring the risk

– any changes in these since the previous period.

Quantitative data including:

– summary quantitative data about the exposure to risk at the period end

– a maturity analysis of non-derivative financial liabilities

– a description of how liquidity risk in relation to non-derivative financial liabilities is

managed

– a sensitivity analysis for market risk

– concentrations of risk if not apparent from other disclosures.



(Case study 2)

13

Key Learning Points

1. Where the terms of an existing financial liability (or part of it) are substantially modified, the

financial liability is extinguished and a new financial liability is recognised.

2. A financial liability is substantially modified if the discounted present value of the cash flows

under the new terms (discounted using the original effective interest rate) is at least 10%

different from the discounted present value of the remaining cash flows of the original

financial liability.

3. The difference between the carrying amount of a financial liability extinguished, and the

consideration paid, including non-cash assets transferred or liabilities assumed is recognised

in profit or loss.

4. The amount recognised in profit or loss includes and costs or fees incurred.

5. If terms of a modified financial liability are not substantially modified, the modification is not

accounted for as an extinguishment and any costs or fees incurred adjust the carrying

amount of the liability and are amortised over the remaining term of the modified liability.


Pre-workshop case study

14

14


Newcastle has owned 50% of Corbridge for a number of years. The other 50% is owned by

an otherwise unrelated company, Morpeth. On the first day of the current accounting period,

Newcastle acquired 80% of Hexham.

The consolidated statement of financial position and statement of comprehensive income

must be prepared for the group, and the following issues considered:

(a) How to account for the investment in Corbridge.

(b) The non-controlling interest is to be measured at fair value.

(c) A fair value adjustment must be made to Hexham’s receivables balance for

consolidation purposes.

(d) Since acquisition, Hexham has sold goods to Newcastle, resulting in a year end

intercompany balance and stock balance.

(e) Since acquisition, Newcastle has transferred a depreciable asset to Hexham, which is

still owned by that company at the year end.


HKAS 28 (2011) Investments in Associates and Joint Ventures

HKFRS 3 (Revised) Business Combinations

HKFRS 10 Consolidated Financial Statements

HKFRS 11 Joint Arrangements


A parent that controls one or more subsidiaries should present consolidated financial statements.

(HKFRS 10.2, LP Chapter 27, Section 1.4)

The assets and liabilities of parent and subsidiary are added together on a line by line basis,

eliminating the investment in subsidiary shown in the parent’s statement of financial position

and any intercompany items.

(HKFRS 10.B86, LP Chapter 27, Section 2.3.1, 2.3.2)

Goodwill arising in a subsidiary acquired in a single transaction is calculated as the excess of

consideration transferred plus the non-controlling interest at the acquisition date over the fair

value of the net assets of the subsidiary on the acquisition date. It is included in the

consolidated statement of financial position as an intangible asset.

(HKFRS 3.32, LP Chapter 27, Section 4.3.4)

The non-controlling interest is measured at the acquisition date either at fair value or as a

proportion of the fair value of the net assets of the acquiree. It is subsequently measured at

this amount plus the non-controlling interest share of post acquisition movement in reserves

and is included in the equity section of the consolidated statement of financial position.


A joint venture is a joint arrangement whereby the parties that have joint control of the

arrangement have rights to the net assets of the arrangement.




15

15

A joint venturer recognises its interest in a joint venture as an investment and should account

for that investment using the equity method in accordance with HKAS 28 (2011) Investments

in Associates and Joint Ventures.

(HKFRS 11.24, LP Chapter 29, Section 2.3.2)

An investment in a joint venture is initially recognised at cost. The carrying amount is

increased or decreased by the investor’s share of the joint venture’s profit or loss and other

comprehensive income after the acquisition date. Dividends received from the joint venture

reduce the carrying amount of the investment in the investor’s accounts.

The investor’s share of a joint venture’s profit or loss and other comprehensive income is

recognised in the investor’s statement of comprehensive income.

(HKAS 28.10-11, LP Chapter 29, Section 2.3.3)

How to apply the standards to the case

Consolidation

The following workings show how the relevant accounting standards are applied to the case.

(W1) Group structure

Newcastle

80% 50%

Hexham Corbridge

(W2) Net asset working - Hexham

The fair value of the net assets of the subsidiary is calculated at the acquisition date for

inclusion in the goodwill calculation and at the reporting date in order to calculate:

– post acquisition movements in reserves (group share) for inclusion in group retained

earnings

– post acquisition movements in reserves (NCI share) for inclusion in NCI

Hexham Net assets at acquisition

Net assets at reporting date

HK$000 HK$000 Share capital 12,000 12,000 Retained earnings 49,000 66,000 Fair value adjustment for receivable 500 -

61,500 78,000

(W3) Goodwill on acquisition - Hexham

HK$000

Cost of investment 57,000 Non-controlling interest 20% x 12m × 5.20

12,480

69,480

Net assets at acquisition (W2) (61,500)

Goodwill 7,980



16

16

Journal for initial recognition of goodwill (HK$000)

DEBIT Share capital 12,000

DEBIT Retained earnings 49,000

DEBIT Receivables 500

DEBIT Goodwill 7,980

CREDIT Cost of investment in Hexham 57,000

CREDIT Non-controlling interest 12,480

An adjustment needs to be made to reflect the fact that the receivables with the fair value

uplift have been settled. The adjustment is (HK$000):

DEBIT Statement of comprehensive income 500

CREDIT Receivables 500

As it relates to Hexham, the debit entry is split between the parent and the non-controlling

interest in proportion to their holding (20%:80%). Therefore in the statement of financial

position, HK$100,000 is debited to the non-controlling interest and HK$400,000 to group

retained earnings.

The question stated that the receivables have been settled or written off during the year. This

will have been reflected in the books of the subsidiary in current year. However, fair value

adjustment is included on acquisition, so both the parent’s and the non-controlling interest’s

shares of the HK $500,000 at the date of acqusition need to be reversed out to avoid double

counting. The reversal is recognised in this year’s statement of comprehensive income to

ensure that this year’s profits are not overstated.

You may understand the mechanism using a hypothetical example.

Say that Hexham wrote off a $500,000 debt in the year prior to acquisition:

DEBIT Bad debt expense 500


This debt is not considered to be bad by Newcastle, and hence on acquisition it is allocated a

fair value of HK$500,000 (so resulting in the FV uplift).

In the year ended 31 March 2012, the debt is settled in full. On receipt of the HK$500,000,

Hexham will make the following entry in its individual books:

DEBIT Cash 500

CREDIT Bad debt expense 500

At group level, however, the correct entry is:

DEBIT Cash 500


Therefore a consolidation adjustment is required to reverse the bad debt recover recognised

by Hexham and recognise the settlement of the receivable recognised by the Group:

DEBIT Bad debt expense 500




17

17

(W4) Non-controlling interest in Hexham

In the statement of comprehensive income, HK$3.4 million, being 20% of Hexham’s profit for

the year of HK$17 million, is allocated to the non-controlling interest. The subsidiary was

acquired on the first day of the year, so this HK$3.4 million is also part of the NCI share of the

post-acquisition retained earnings of Hexham:

DEBIT Retained earnings 3,400

CREDIT Non-controlling interest 3,400

(W5) Intercompany trading

(i) Intercompany sales are cancelled from the consolidated statement of comprehensive

income by (HK$000):

DEBIT Revenue 750

CREDIT Cost of sales 750

(ii) The intercompany receivable and payable accounts must be cancelled. In this case

they are not equal due to cash in transit. Therefore in the first instance, the cash must

be accounted for as received in Hexham’s accounts (HK$000):

DEBIT Overdraft 10

CREDIT Receivable 10

(iii) The intercompany amounts are now equal and may be cancelled (HK$000):

DEBIT Payables 240


(iv) There is an unrealised profit in inventory of HK$75,000 (1/2 × HK$750,000 × 25/125).

This is removed from inventory and profit in Hexham, the selling company (HK$000):

DEBIT Cost of sales 75

CREDIT Inventory 75

As Hexham is the selling company, the profit adjustment impacts the non-controlling

interest. HK$15,000 is allocated to the NCI and the remaining HK$60,000 to the parent.

In the consolidated statement of financial position, the journal is (HK$000):

DEBIT Non-controlling interest 15

DEBIT Retained earnings 60

CREDIT Inventory 75

(W6) Intercompany transfer of non-current asset

(i) During the year, Newcastle transferred a machine to Hexham. Any profit or loss

recognised on this transfer in Newcastle’s accounts must be eliminated on

consolidation:

HK$ HK$ Proceeds on disposal 190,000 Carrying value at disposal: Cost 400,000

Depreciation (6/10 yrs) (240,000)

(160,000)

Profit on disposal 30,000



18

18

The necessary elimination journal is (HK$000):

DEBIT Other gain or loss 30

CREDIT PPE 30

As the parent company is the seller, the adjustment does not affect the non-controlling

interest in profit.

The debit entry is made to retained earnings in the statement of financial position.

(ii) In addition, any increase or decrease in the depreciation charge as a result of the

transfer must be eliminated from the consolidated accounts.

HK$

Annual depreciation charge prior to transfer HK$400,000/10 years 40,000

Annual depreciation charge post transfer HK$190,000/ 4 years 47,500

Increase 7,500

As the transfer took place half way through the financial year, the required adjustment,

is (HK$000):

DEBIT PPE (7,500 × 6/12m) 4

CREDIT Cost of sales 4

Again, the adjustment does not affect the non-controlling interest since the selling

company is the parent. The credit entry is therefore to retained earnings in the

statement of financial position.

(W7) Investment in Corbridge

Newcastle, along with Morpeth, has rights to the net assets of Corbridge. Therefore the

investment qualifies as a joint venture in accordance with HKFRS 11 and is equity accounted

for in accordance with HKAS 28 (Revised). Therefore, the investment is held at cost plus the

venturer’s share of profits made since acquisition.

Between the acquisition date and end of the current accounting period, Corbridge made a

profit of HK$29m (HK$74m – 45m).

Newcastle’s share is therefore brought into the consolidated statement of financial position by

(HK$'000):

DEBIT Investment in Corbridge (1/2 × 29m) 14,500

CREDIT Retained earnings b/f (14,500 – 6,150) 8,350

CREDIT Retained earnings for the current year 6,150

Of the amount credited to retained earnings, HK$6.15m (1/2 × 12,300) are current year

earnings. These are reported in the consolidated statement of comprehensive income as the

share of profit of joint venture.



19

Consolidated statement of financial position at 31 March 2012

Newcastle Hexham Subtotal (W3) (W4) (W5) (ii) (W5) (iii) (W5) (iv) (W6) (i) (W6) (ii) (W7) Consolidated

HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000

Property, plant and equipment 168,400 65,670 234,070 (30) 4 234,044

Intangible assets 12,430 8,500 20,930 20,930

Goodwill - - - 7,980 7,980

Investment in Hexham 57,000 - 57,000 (57,000) -

Investment in Corbridge 34,500 - 34,500 14,500 49,000

272,330 74,170 346,500 311,954

Inventories 28,900 12,340 41,240 (75) 41,165

Trade receivables 42,450 12,675 55,125 500 (500) (10) (240) 54,875

US receivable - 5,625 5,625 5,625

Cash 1,630 - 1,630 1,630

72,980 30,640 103,620 103,295

345,310 104,810 450,120 415,249

Ordinary share cap 60,000 12,000 72,000 (12,000) 60,000

Retained earnings 210,330 66,000 276,330 (49,000) (400) (3,400) (60) (30) 4 14,500 237,944

270,330 78,000 348,330 297,944

Non controlling interest - - - 12,480 (100) 3,400 (15) 15,765

313,709

Deferred tax 19,340 8,500 27,840 27,840

Provisions 100 - 100 100

19,440 8,500 27,940 27,940

Overdraft - 2,450 2,450 (10) 2,440

Trade payables 33,250 12,110 45,360 (240) 45,120

Finance lease obligation 4,700 - 4,700 4,700

Income tax payable 4,150 2,450 6,600 6,600

Accrual 13,440 1,300 14,740 14,740

55,540 18,310 73,850 73,600

345,310 104,810 450,120 415,249



20

Consolidated statement of comprehensive income for the year ended 31 March 2012

Newcastle Hexham Subtotal (W3) (W4) (W5)(i) (W5)(iv) (W6) (i) (W6) (ii) (W7) Consolidated

HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000 HK$000

Revenue 240,120 85,770 325,890 (750) 325,140

Cost of sales (167,500) (52,300) (219,800) 750 (75) 4 (219,121)

Gross profit 106,019

Distribution costs (23,100) (6,520) (29,620) (29,620)

Administrative

expenses

(26,900) (6,450) (33,350) (500) (33,850)

Exchange loss - (225) (225) (225)

Share of profits of

joint venture

6,150 6,150

Other gains and

losses

200 (15) 185 (30) 155

______

Profit before

interest and tax

48,629

Finance charge (450) (60) (510) (510)

Profit before tax 48,119

Income tax

charge (3,810) (3,200) (7,010) (7,010)

Profit for the year 18,560 17,000 35,560 (75) (30) 4 6,150 41,109

Total

comprehensive

income

18,560 17,000 35,560 (75) (30) 4 6,150 41,109

Profit attributable

to owners of

parent (balancing

figure)

(400) (60) (30) 4 6,150 37,824

Profit attributable

to NCI

- (100) 3,400 (15) 3,285

TCI attributable to

owners of parent

(balancing figure)

(400) (60) (30) 4 6,150 37,824

TCI attributable to

NCI

(100) 3,400 (15) 3,285



(Additional Information 1)

21

Consolidation

Additional information 1 The following information relates to the Newcastle Group:

1. Newcastle’s individual company statement of financial position as at 31 March 2011 was as

follows:

HK$000

Non-current assets

Property, plant and equipment 174,600

Intangible assets 9,300

Investment in Corbridge 34,500

218,400

Current assets

Inventories 29,350

Trade receivables 46,800

Cash 58,780

134,930

353,330

Equity

HK$1 ordinary share capital 50,000

Retained earnings 196,370

246,370


Deferred tax liability 19,610

Provision 600

Finance lease obligation 4,700

24,910

Current liabilities

Overdraft 22,000

Trade payables 40,630

Finance lease obligation 4,600

Income tax payable 3,940

Accrual 10,880

82,050

353,330

In Newcastle’s individual accounts, the investment in Corbridge is held at cost in accordance

with HKAS 28 and HKAS 27.10.




22

2. At the date of acquisition, the statement of financial position of Hexham was as follows:

HK$000

Non-current assets

Property, plant and equipment 70,195

Intangible assets 9,400

79,595

Current assets

Inventories 8,320

Trade receivables 11,450

Cash 230

20,000

99,595

Equity

HK$1 ordinary share capital 12,000

Retained earnings 49,000

61,000


Deferred tax liability 7,710

Current liabilities

Trade payables 22,035

Income tax payable 3,100

Accrual 5,750

30,885

99,595

3. Included in determining the profits of the respective companies for the year ended 31 March

2012 are the following amounts:

Newcastle Hexham Corbridge

HK$000 HK$000 HK$000

Depreciation 20,200 7,880 10,200

Amortisation 600 900 460

Loss / (profit) on disposal of

property, plant and

equipment

(8,390) 360 700

4. During the year, Newcastle and Hexham disposed of property, plant and equipment with

carrying amounts of HK$9.68 million and HK$845,000 respectively.

5. Newcastle’s finance lease is in respect of an item of machinery. The lease agreement

requires payments of HK$5 million per annum in arrears, and is due to expire in the year

ended 31 March 2013.

6. Overdrafts in all group companies are repayable on demand.

Required:

Prepare the consolidated statement of cash flows for the Newcastle Group for the year

ended 31 March 2012 using the indirect method.



(Additional information 1)

23 23

Discussion points


The consolidated statement of financial position of Newcastle at the start of the year and that

of Hexham on its acquisition date are provided, along with other information regarding

transactions in the year ended 31 March 2012.

Using this information together with the consolidated financial statements for Newcastle

prepared in the pre-workshop case study, students are required to prepare a consolidated

statement of cash flows for the Newcastle Group for the year ended 31 March 2012.


HKAS 7 Statement of Cash Flows


The statement of cash flows shall report cash flows during the period classified by operating,

investing and financing activities.


Cash flows are inflows and outflows of cash and cash equivalents.

Cash includes cash on hand and demand deposits; cash equivalents are short-term, highly

liquid investments that are readily convertible to known amounts of cash and which are

subject to an insignificant risk of changes in value.

Operating activities are the principal revenue-producing activities of the entity and other

activities that are not investing or financing activities; investing activities are the acquisition

and disposal of long term assets and other investments not included in cash equivalents;

financing activities are activities that result in changes in the size and composition of the

contributed equity and borrowings of the entity.


Bank borrowings are generally considered to be financing activities. However, in some

countries, bank overdrafts which are repayable on demand form an integral part of an entity's

cash management. In these circumstances, bank overdrafts are included as a component of

cash and cash equivalents.


Cash flows from operating activities are primarily derived from the principal revenue-

producing activities of the entity. An entity shall report cash flows from operating activities

using either:

(a) the direct method, whereby major classes of gross cash receipts and gross cash

payments are disclosed, or

(b) the indirect method, whereby any profit or loss is adjusted for certain items.

(HKAS 7.14, 18, LP Chapter 20, Section 2.2 )

Under the indirect method, the net cash flow from operating activities is determined by

adjusting profit or loss for the effects of:

(a) changes during the period in inventories and operating receivables and payables

http://eifrs.ifrs.org/eifrs/stdcontent/Red_Book_2011/IAS07c_2004-03-31_en-2.html#SL131365













24

(b) non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign

currency gains and losses and undistributed profits of associates, and

(c) all other items for which the cash effects are investing or financing cash flows.


Cash flows arising from taxes on income are separately disclosed and classified as cash

flows from operating activities unless they can be specifically identified with financing and

investing activities.


Examples of cash flows arising from investing activities are:

(a) cash payments to acquire property, plant and equipment, intangibles and other long-

term assets

(b) cash receipts from sales of property, plant and equipment, intangibles and other long-

term assets

(c) cash payments to acquire equity or debt instruments of other entities (other than

payments for those instruments considered to be cash equivalents).


The aggregate cash flows arising from obtaining or losing control of subsidiaries or other

businesses shall be presented separately and classified as investing activities.

(HKAS 7.39, 42, LP Chapter 20, Section 3.1)

Examples of cash flows arising from financing activities are:

(a) cash proceeds from issuing shares

(b) cash payments by a lessee for the reduction of the outstanding liability relating to a

finance lease.


Cash flows from interest and dividends received and paid are disclosed separately and

classified consistently from period to period as either operating, investing or financing

activities.


Unrealised gains and losses arising from changes in foreign currency exchange rates are not

cash flows. However, the effect of exchange rate changes on cash and cash equivalents held

or due in a foreign currency is reported in the statement of cash flows in order to reconcile

cash and cash equivalents at the beginning and the end of the period. This amount is

presented separately from cash flows from operating, investing and financing activities and

includes the differences, if any, had those cash flows been reported at end of period

exchange rates.


An entity which reports an interest in a joint venture using the equity method should include in

its statement of cash flows the cash flows in respect of its investments in the joint venture,

and distributions and other payments or receipts between it and the joint venture.
















25 25

How to apply the standard to the case

Operating activities

The first stage in preparing the consolidated statement of cash flows is to reconcile the profit

for the year to the cash generated by operations, adjusting for non-cash items in the

consolidated statement of comprehensive income and also for movements in working capital.

Non-cash items

The profit before tax for the year of HK$48,119,000 is the starting point for this reconciliation,

and this is initially adjusted for the following non-cash items:

Finance charge of HK$510,000

Share of profit of the joint venture of HK$6.15 million

The exchange loss of HK$225,000

Depreciation of HK$28,076,000 (see W1) and amortisation of HK$1.5 million

The loss on disposal of property, plant and equipment of HK$360,000 and profit on

disposal of HK$8.36 million (see W2)

The decrease in provisions by HK$500,000

Reversal of receivables fair value uplift HK$500,000

(W1) The depreciation adjustment is calculated as:

HK$000

Depreciation charge – Newcastle 20,200

Depreciation charge – Hexham 7,880

Adjustment to depreciation charge on consolidation (pre-workshop

case study W6(ii))

(4)

28,076

(W2) The adjustment for profit on disposal of property, plant and equipment is calculated as:

HK$000

Profit on disposal – Newcastle 8,390

Intercompany profit eliminated on consolidation (pre-workshop case

study W6(i))

(30)

8,360

(W3) Movements in working capital

The movements in working capital over the course of the year are adjusted for, taking into

account the acquisition of the subsidiary:

HK$000

Inventory At 31 March 2011 29,350

At 31 March 2012 41,165

Increase 11,815

Less amount attributable to acquisition of sub (8,320)

Net increase 3,495




26

Receivables At 31 March 2011 46,800

(excluding US) At 31 March 2012 54,875

Increase 8,075


Reversal of FV adjustment made on

acquisition of sub

500

Net decrease (3,375)

Trade payables At 31 March 2011 40,630

At 31 March 2012 45,120

Increase 4,490



Accrual At 31 March 2011 10,880

At 31 March 2012 14,740

Increase 3,860



In the case of the US trade receivable, the exchange loss is taken into account when

considering the movement:

HK$000

US receivable At 31 March 2011 -

At 31 March 2012 5,625

Increase 5,625

Add back exchange loss 225

Increase 5,850

The next stage in preparing the statement of cash flows is the calculation of cash flows in

relation to operating activities. In this case, interest paid is simply the amount in the

consolidated statement of comprehensive income. Tax paid, however requires calculating, as

follows:

(W4) Income taxes paid

HK$000

Newcastle Income tax b/f 3,940

Deferred tax b/f 19,610

Hexham acquisition Income tax 3,100

Deferred tax 7,710

Consolidated tax charge 7,010

41,370

Consolidated Income tax c/f (6,600)

Deferred tax c/f (27,840)

Tax paid 6,930

Investing activities

Non-current assets and the acquisition of the subsidiary are dealt with in the investing

activities section of the statement of cash flows.




27 27

(W5) Proceeds on disposal of property, plant and equipment

Proceeds is calculated by adjusting the carrying amount of the assets disposed of (given in

the additional information) by the profit or loss on disposal. This calculation should also take

into account the intercompany transfer.

HK$000 HK$000

Newcastle

Carrying amount of disposal 9,680

Profit on disposal 8,390

18,070

Less intercompany proceeds (pre-workshop

case study working 6(i))

(190)

17,880

HK$000 HK$000

Hexham

Carrying amount of disposal 845

Loss on disposal (360)

485

Total proceeds 18,365

(W6) Purchases of property, plant and equipment

HK$000

Consolidated property, plant and equipment at 31 March

2012

234,044

Depreciation charge (W1) 28,076

Carrying amount of disposals (9,680 – 190 + 30 + 845) 10,365

272,485

Newcastle property, plant and equipment at 31 March

2011

(174,600)

Hexham property, plant and equipment on acquisition (70,195)

Purchases of property, plant and equipment 27,690

(W7) Purchases of intangible assets

HK$000

Consolidated intangible assets c/f 20,930

Amortisation charge (600 + 900) 1,500

22,430

Newcastle intangible assets b/f (9,300)

Hexham intangible assets on acquisition (9,400)

Purchases of intangible assets 3,730

(W8) Acquisition of subsidiary

The acquisition of the subsidiary is included in the statement of cash flows at the cash paid for

the investment net of any cash held by the subsidiary on the date of acquisition:

HK$000

Cash paid to acquire Hexham (pre-workshop case study

background information)

57,000

Cash held by subsidiary on acquisition date (230)

56,770




28

Financing activities

Dividends paid, the issue of shares and the payment in respect of finance leases are dealt

with in this section of the statement of cash flows.

(W9) Dividends paid

We are told in the pre-workshop case study that the only group company which has paid a

dividend is Newcastle, the parent company. The amount of the dividend is calculated by

considering the movement in Newcastle’s retained earnings balance:

HK$000

Retained earnings b/f 196,370

Newcastle’s profit for the year 18,560

Retained earnings c/f (210,330)

Dividends paid 4,600

(W10) Repayment of obligations under finance leases

Again, the amount paid in respect of finance leases is established by considering the

movement in the finance lease obligation in the statement of financial position:

HK$000

Finance lease obligation b/f (4,700 + 4,600) 9,300

Finance lease obligation c/f (4,700)

Cash paid 4,600

(W11) Proceeds on issue of shares

Newcastle has issued shares during the period, with its share capital increasing by

HK$10 million. As there is no share premium account in Newcastle, this HK$10 million is the

cash inflow.

(W12) Cash and cash equivalents

Cash Overdraft Total

HK$000 HK$000 HK$000

B/f 58,780 (22,000) 36,780

C/f 1,630 (2,440) (810)




29 29


Consolidated Statement of Cash Flows for the Newcastle Group for the year ended 31 March 2012

Ref HK$000

Profit before tax for the year 48,119

Adjustment for:

Finance charge 510

Share of profit of joint venture (6,150)

Exchange loss 225

Depreciation (20,200 + 7,880 – 4) (W1) 28,076

Amortisation (600 + 900) 1,500

Loss on disposal 360

Profit on disposal (8,390 – 30) (W2) (8,360)

Decrease in provisions (500)

Reversal of receivables fair value uplift 500

Operating cash flows before movements in working capital 64,280

Increase in inventories (W3) (3,495)

Decrease in receivables (W3) 3,375

Increase in US receivable (W3) (5,850)

Decrease in trade payables (W3) (17,545)

Decrease in accrual (W3) (1,890)

Cash generated from operations 38,875

Income taxes paid (W4) (6,930)

Interest paid (510)

Net cash from operating activities 31,435

Investing activities

Proceeds from disposal of property, plant and equipment (W5) 18,365

Purchases of property, plant and equipment (W6) (27,690)

Payment for intangible assets (W7) (3,730)

Net cash outflow on acquisition of subsidiary (W8) (56,770)

Net cash used in investing activities (69,825)

Financing activities

Dividends paid (W9) (4,600)

Repayment of obligations under finance leases (W10) (4,600)

Proceeds from issue of share capital (W11) 10,000

Net cash from financing activities 800

Net decrease in cash and cash equivalents (37,590)

Cash and cash equivalents at beginning of year (W12) 36,780

Cash and cash equivalents at end of year (W12) (810)




30

Key Learning Points

1. A statement of cash flows is prepared for the same period as a statement of

comprehensive income and classifies cash flows into those arising as a result of

operating, investing and financing activities.

2. The net cash flow from operating activities can be calculated using either the direct or

indirect method; the indirect method involves adjusting profit before tax for non-cash

items, non-operating items and the effect of the accrual basis of accounting.

3. Tax paid is normally included as a cash flow from operating activities; interest and

dividends paid and received may be classified as cash flows from operating, investing

or financing activities, but the classification must be consistent from year to year.

4. Cash flows associated with the acquisition and sale of property, plant and equipment,

intangible assets and the acquisition and disposal of investments including group

entities are classified as cash flows from investing activities.

5. Cash flows associated with the issue of shares and debt (including finance lease

obligations) are classified as cash flows from financing activities.

6. Where a subsidiary has been acquired in the year, the asset and liability balances

acquired must be taken into account when calculating movements in working capital

and cash flows.

7. Cash paid to acquire a subsidiary is included in the statement of cash flows net of any

cash held by the subsidiary at the date of acquisition.

8. Cash equivalents are short-term highly liquid investments that are readily convertible to

known amounts of cash.




31

Consolidation

Additional information 2 With reference to the research that you prepared prior to attending the workshop, prepare

the required notes to the consolidated statement of cash flows for the Newcastle Group for

the year ended 31 March 2012.




32

Discussion points


Disclosure notes to the statement of cash flows are required for the Newcastle Group in

respect of:

(a) cash and cash equivalents

(b) the acquisition of the subsidiary.


HKAS 7 Statement of Cash Flows


Disclosure is required of the components of cash and cash equivalents together with a

reconciliation of the amounts in its statement of cash flows with the equivalent items reported

in the statement of financial position.


All entities should disclose, together with a commentary by management, any other

information likely to be of importance, for example:

(a) Restrictions on the use of or access to any part of cash equivalents.

(b) The amount of undrawn borrowing facilities which are available.

(c) Cash flows which increased operating capacity compared to cash flows which merely

maintained operating capacity.

(HKAS 7.48-50, LP Chapter 20, Section 2.4.3)

Disclosure is required, in aggregate, in respect of obtaining control of subsidiaries, of each of

the following:

(a) The total consideration paid or received

(b) The portion of the consideration consisting of cash and cash equivalents

(c) The amount of cash and cash equivalents in the subsidiary over which control is

obtained

(d) The amount of the assets and liabilities other than cash and cash equivalents in the

subsidiary over which control is obtained, summarised by each major category.







33

How to apply the standard to the case / Recommendation / Justification

Cash and cash equivalents

31 March 2012

HK$000

31 March 2011

HK$000

Cash and bank balances 1,630 58,780

Bank overdrafts (2,440) (22,000)

(810) 36,780

Cash and cash equivalents comprise cash and short-term bank deposits with an original

maturity term of three months or less, net of outstanding bank overdrafts. The carrying

amount of these assets is approximately equal to their fair value.

Acquisition of a subsidiary

On 1 April 2011, Newcastle acquired 80% of the issued share capital of Hexham for cash

consideration of HK$57 million. This transaction has been accounted for by the purchase

method of accounting.

Book value

HK$000

Fair value

HK$000

Net assets acquired:

Property, plant and equipment 70,195 70,195

Intangible assets 9,400 9,400

Inventories 8,320 8,320

Trade receivables 11,450 11,950

Cash 230 230

Deferred tax liability (7,710) (7,710)

Trade payables (22,035) (22,035)

Income tax payable (3,100) (3,100)

Accrual (5,750) (5,750)

61,000 61,500

Goodwill 7,980

Non-controlling interest (12,480)

Total consideration 57,000

Satisfied by:

Cash 57,000

Net cash outflow arising on acquisition:

Cash consideration 57,000

Cash and cash equivalents acquired (230)

56,770

The goodwill arising on the acquisition of Hexham is attributable to the anticipated profitability

of this company and future operating synergies from the combination.

Hexham has contributed HK$85,770,000 to revenues and HK$17 million to profits since

acquisition.




34

Key Learning Points

1. Entities must disclose components of cash and cash equivalents together with a

reconciliation of the amounts in the statement of cash flows to the equivalent amounts

in the statement of financial position.

2. Where a subsidiary has been acquired, disclosure is required of the consideration paid,

the amount of consideration consisting of cash and cash equivalents, cash and cash

equivalents of the subsidiary obtained through the acquisition, and other assets and

liabilities of the subsidiary by category.

Documents

Student Notes Module A (June 2012)… · Module A (June 2012) Workshop 2 – Handout 6.1 (Case study 1) 1 Financial instruments Case study 1 Foxtrot Alpha Limited (‘FAL’) is a